Inflation, CAD limit scope for monetary action: RBI

Citing high inflation and widening Current Account Deficit (CAD) as big constraints, Reserve Bank on Monday said there is limited scope for monetary actions like interest rate cut to boost growth in the third quarter policy to be announced on Tuesday.

"Given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained,” RBI said in its report on Macroeconomic and Monetary Developments issued on the eve of policy.

The central bank, however, said that with the government executing economic reforms measures, it would be possible for the monetary policy to increasingly focus on revival of growth.

Meanwhile, the professional forecasters sponsored by the RBI have lowered the growth projection for the current fiscal to 5.5 per cent from 5.6 per cent projected earlier. They have also cut the growth forecast for the next financial year to 6.5 per cent from 6.6 per cent.

As regards inflation, RBI said it was likely to moderate below its projection of 7.5 per cent by March-end. However, it added, "suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn stick."

Referring to recent reforms initiatives, it said, "(they) have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy. Business sentiments remain weak despite reform initiatives and consumer confidence

is edging down."

On an overall assessment of macro-economic situation, the RBI said, monetary policy would undertake only calibrated action in view of inflation, which at over 7.18 per cent in December, was much above the central bank's comfort level.

Average WPI inflation, it said, was expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14.

The economic growth in 2012-13 was likely to fall below its projection of 5.8 per cent, RBI said, adding "output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand."

The revival of growth, which has remained below potential for the fifth successive quarter might take some more time as "policy initiatives of the government are yet to show up fully or definitively in data." the RBI said.

Moreover, it said, the weak industrial performance was likely to persist on account of factors like subdued external demand and lack of reliable power supply amidst coal shortages.

"Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures", RBI said.

Observing that improvement in investment climate is a prerequisite for economic recovery, the RBI said, "demand conditions remained tepid, with private consumption continuing to decelerate and with investment yet to recover".

It further said that the trend of sluggish sales by India Inc was likely to continue in the third quarter of the current fiscal.